Australia is in a strong position, but must adapt to take full advantage of rising Asia, OECD says

The Australian economy is robust and faces a solid short-term outlook, but it must continue adapting to ensure that its privileged place in the Asia-Pacific region contributes to long-term sustainable growth, according to the OECD’s latest Economic Survey of Australia.

The report recognises the strong performance of the Australian economy and its resilience to the global economic crisis. It notes, however, that activity has moderated with GDP expected to grow by about 3 ¾% in 2012 and by about 3% annually over the 2013-14 period.

“Australia’s long period of uninterrupted economic growth makes it the Iron Man among the OECD countries,” said OECD Secretary-General Angel Gurría said. “The rise of Asia has driven Australian natural resource exports and is providing enormous new opportunities for the agriculture, education and tourism sectors, but it has also imposed significant challenges and strains. The strong Australian dollar resulting from the mining boom is imposing considerable structural changes on the economy,” Mr. Gurría said.

The OECD identifies several priority areas for action:

Taking steps to build a more productive and competitive Australia. Despite Australia’s strong economic performance, productivity growth has slowed. After peaking in the 1990s, it is now below its long-run average. Improving education and training programmes is critical for meeting future skills needs, boosting innovation and creating jobs. More effective infrastructure policy, including better planning and more efficient financing, can resolve bottlenecks that hold back productivity. Harmonising regulation across states – from electricity network interconnection to environmental approval processes and cross-state licensing rules for legal and other professions – would foster competition and also boost productivity.

Smoothing the transition to a 21st century economy. Australia needs to maintain flexible markets, introduce tax reforms and enhance its medium-term fiscal strategy, so its economy is prepared to take full advantage of the wide-ranging changes taking place. This means ending public subsidies for industries or sectors where the country no longer has a comparative advantage, including agriculture, automotive manufacturing and energy. Resulting budgetary savings could be used to fund a reduction in Australia’s 30% corporate tax rates, which remains too high. The medium-term objective of reducing net debt is welcome, but the government should also consider creating a stabilisation fund to capture mining-related revenues and insulate budget and spending decisions from commodity price swings.

Creating a cleaner and greener economy. The OECD welcomes ongoing efforts to disentangle emissions from economic growth, specifically through introduction of a carbon tax and a flexible carbon price based on an emission trading system linked to international markets. This is the best option to reduce greenhouse gas emissions and put Australia on a more sustainable, low-pollution growth path. Better water management, including more effective water pricing, an end to inefficient irrigation subsidies and suppressing barriers to water trade between rural and urban areas, would boost sustainability.